Carlyle Group Founder Is Bullish on Private Equity

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- By John Engle

As the private equity industry has gained steam, many investors have become worried. Flooded with cash, private equity has grown in power and scope. Here is the problem: Financial and legal impediments still abound for ordinary investors trying to gain exposure to private equity and other non-traded assets.

Could the expansion of private equity into a wider range and scale of assets further curtail the amount of the "real economy" to which retail investors can gain exposure?


Daniel D'Aniello, co-founder of The Carlyle Group (CG), does not seem to be worried. Indeed, he is not just bullish about the industry. In a recent interview , he also expressed confidence that a far wider population of investors will be able - and willing - to reap the rewards of private equity in times ahead. That could have profound impacts on the way people invest - and the way capital markets function in the next generation.

Going public no longer essential

According to D'Aniello, the massive scale of the current private equity market - fueled by off-the-chart demand and allocations - has led to public offerings becoming less attractive for many businesses:


"What makes me so bullish about it is that in some regards it's a very viable option to the standard go-to-IPO routine that was more or less the only way that entrepreneurs could fund themselves to scale. Nowadays, private equity has enough money to hold high quality and high growth companies much longer in their life."



The flood of capital into private equity has given the industry considerably more firepower, with the ability to do much more. Indeed, venture capital and private equity have begun to merge at the edges, with the preponderance of fund-backed unicorn businesses in the current market cycle.

D'Aniello believes the industry has helped to break the iron grip once held by the inital public offering as the only method by which entrepreneurs can achieve scale - or enjoy a major liquidity event. This has had considerable benefits for the entrepreneurs themselves in many cases:


"The entrepreneurs involved have the ability, therefore, to earn a lot more from their life's work."



Undoubtedly, D'Aniello is correct where entrepreneurs are concerned. Still, IPOs will remain essential components of the markets, as even the biggest unicorns want to list eventually.

More importantly, fewer public companies has traditionally meant less access to retail investors. That could be a problem.

Democratizing private equity

The trends D'Aniello cites, such as fewer IPOs and the dominance of massive allocators, might at first appear to run contrary to the interests of smaller investors, but the industry veteran actually thinks otherwise:


"You're talking about retail investors coming into the asset class, and that could eventually occur; everybody's working on the formula for it. But, you know, it starts with feeder funds and things of that nature through the investment banks And of course, not everybody has the ability and patience for an illiquid position...As private equity develops more yield-based alternatives, you will find many more private individuals being attracted to invest. And in some regards, they can now, in MLPs [master limited partnerships], in RICs [regulated investment companies], in BDCs [business development companies], in REITS [real estate investment trusts], though these tend to be less traditional private equity and more private credit, energy and real estate."



Few investors can afford to make allocations to private equity. Retail investors usually lack the capital for minimum commitments to deals or funds, and most are not accredited investors (legally blocking them from making such allocations). D'Aniello does not address these points head-on, but he does see progress toward improving opportunities for ordinary people to invest in the "real economy" that has traditionally been off limits to them.

Feeder funds are certainly a start, as are MLPs and the preponderance of REITs. But there is much more to do.

Life (and investment) finds a way

As we have discussed in the past, relaxed regulations and more fluid platforms for investment could hold the key to retail investors accessing a vast asset class long denied to them. But these developments are very new, and government regulations have proven slow to adapt to new realities.

D'Aniello's bullish outlook relies on the recent trends in the industry to continue on their progressive course. While the legal and regulatory environment continues to (ever so slowly) improve for retail investors, alternative mechanisms for accessing private investing opportunities have continued to multiply in number and sophistication. Equity crowdfunding platforms such as WeFunder have been gaining traction, as has a supporting ecosystem, such as the of specialized research and vetting services offered by KingsCrowd.

It is still early days for such platforms. A few events could throw a spanner in the works for them, but they offer a very promising start.

Verdict

D'Aniello is one of the greats of private equity, so anyone interested in the sector would be wise to listen when he speaks. Huge capital allocations will continue to open new opportunities for the sector, but also run the risk of elevating prices as an increasingly competitive industry seeks to put unprecedented amounts of dry powder to work. Deal chasing could result in an overheated market - a concern worth considering in these uncertain times.

Still, the more options available to investors, the better. With more than $200 billion in assets under management, Carlyle has become a private equity behemoth, but it could grow considerably more if the industry were set free.

Disclosure: No positions.

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This article first appeared on GuruFocus.


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